For many people, in particular, Millennials who are really at the beginning of their careers and financial journeys, there’s a big question lingering:
Should I save money or invest it?
The idea of jumping into investments can be one that’s intimidating for a lot of people, and that holds them back from doing it, but they then wonder if they’re losing out on opportunities to build wealth as a result. At the same time, some risks come with investing, and plenty of people, particularly Millennials, tend to be risk-averse.
So how do you know the right answer when it comes to whether to save or invest money?
How Much Savings Do You Have?
Before you think about whether or not you should invest in things such as stocks and mutual funds, you need to ensure you actually do have a comfortable emergency fund put aside. Only then can you really start gauging your next money moves.
Most financial professionals recommend having at least enough money set aside to cover all your personal expenses for at least six months, in the event that you lose your job or run into an unforeseen situation.
If you have that covered, then you can start determining your more in-depth savings and investing strategies.
Are You Saving For a Big Purchase?
If you’re at a point in your life where you’re saving for a big purchase, such as a new home, you should err more on the side of traditional savings.
Returns are minimal when you stash your money in a savings account or money market, but there can be a lot of volatility in the stock market, so your investments could lose a lot of their value. If that happens, it’s fine if you have savings set aside and a long-term investment horizon.
If you’re planning to buy a house anytime soon, however, you’d be in a very difficult situation if all of your money was tied up in investments and it took a dip.
What Is Your Debt Situation?
Most financial professionals recommend investing as soon as possible so that your earnings can be reinvested over time, snowballing and helping you build wealth slowly. However, there is a group of people that experts often tell to hold off on investing.
That is people who have a high amount of debt.
The best thing you can do if you have outstanding student loans, credit card bills or other similar types of debt is work toward paying them off and then saving an emergency fund, rather than trying to start investing yet.
Debt can take a toll on your finances and your ability to build wealth, particularly if you’re paying high interest rates, so getting rid of debt should be your number one financial priority.
These are some of the top things to consider when you weigh whether to save or invest. Of course, in an ideal situation, you can do both, which doesn’t require as much money as you might think. Even small amounts of savings and investments starting from a young age can set you up for a strong financial future.
Also, once you master the basics of investing in places like the stock market and you have a comfortable savings, you can move on to more complex investment strategies such as pre-market trading, which will allow you to take more risk but perhaps earn more rewards as well.
Understanding your personal finances is a slow, steady process where you move forward one small step at a time for the best outcome.